Check fees on 403(b) plans
If you're a teacher or employee of a nonprofit hospital or health care organization, you likely invest in a 403(b) retirement plan.
These plans have the same tax benefits and contribution maximums as 401(k) plans. But there the similarities end. The 403(b) plans offered by schools, local governments and churches aren't covered by the Employee Retirement Income Security Act. Some large nonprofit employers adhere to ERISA standards, but most public school districts are reluctant to get in the business of vetting retirement plans. Rather, they turn the job over to insurance and mutual fund sales representatives, who may promote investments that generate the highest commissions rather than the highest returns.
That leaves participants with a mix of high-cost annuities and other insurance products. On average, variable annuities charge 2.25 percent annually, compared with 1.4 percent for mutual funds and 0.18 percent for no-load index funds. Over 35 years, assuming a $250 monthly contribution and a 6 percent average annual return, an employee who invested in a variable annuity would end up with a balance of $214,429, compared with $255,712 for the mutual fund and $331,820 for the no-load index fund. An analysis by Aon, a retirement consultant, estimates that 403(b) plan participants lose nearly $10 billion each year in excessive fees.
Some of the investment products sold to public school employees also have surrender charges that make it prohibitively expensive to switch to a less costly provider, says Dave Grant, a Chicago-based certified financial planner who provides advice to teachers (and he's married to one). Grant says one of his clients had to pay $1,000 in surrender charges to get out of an annuity-filled 403(b) plan that had a balance of just $14,000.
If you're offered a 403(b) plan, scrutinize the choices available to you. Some lists provided by public school districts include mutual funds with reasonable fees. In that case, it's worth taking advantage of the tax-deferred growth and high contribution limits available from a 403(b) plan.
Some school districts offer both a 403(b) plan and a 457 plan, and you can invest up to the maximum in both. If you have that option and the 457 plan is superior, max it out first. Another alternative for teachers with lackluster 403(b) plans is a Roth IRA. In 2017, you can contribute up to $5,500, or $6,500 if you're 50 or older, to a Roth. You can withdraw the money tax-free after age 591/2, and you can tap contributions without paying taxes or penalties at any time.
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